How Older Homeowners Can Use a Reverse Mortgage

For some seniors in Canada, most of their net worth may be tied up in their homes. This can present a cash flow problem if they’re struggling to manage their day-to-day finances. The traditional way to access your home’s equity would be to get a home equity line of credit (HELOC) or sell. However, getting a reverse mortgage has become an increasingly popular option for Canadians age 55 and older.

What is a reverse mortgage?

A reverse mortgage is a loan that allows you to unlock up to 55% of the current value of your home without selling. It’s the opposite of a traditional mortgage. Instead of making monthly payments, the lender pays you.

Since a reverse mortgage unlocks equity, it is often referred to as equity release. While this is clearly an appealing solution for some homeowners, you will owe more interest the longer you go without repaying the loan.

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How to get a reverse mortgage

To get a reverse mortgage, you need to meet a few conditions:

• You must own your home
• The home must be your primary residence (you live there at least six months a year)
• All owners must be at least 55 years old

During the application process, you must include all individuals listed on the title. Lenders may also ask you to get legal advice regarding a reverse mortgage. Proof of this advice may be required.

The maximum amount you’ll be able to get depends on the following:

• Your age
• Your home’s appraised value
• The condition of your home
• The location of your home
• Your lender

If approved, you can choose to take a one-time lump sum, instalments, or a combination of the two. Which option you decide on could affect how much interest you’re charged, so you’ll want to ask your lender about the details.

Only two financial institutions offer a reverse mortgage in Canada. HomeEquity Bank offers their Canadian Home Income Plan (CHIP) Reverse Mortgage, which is available across the country. There’s also Equitable Bank, which does reverse mortgages for homes located in major urban centres.

How to repay a reverse mortgage

A second mortgage isn’t free. You’ll need to repay this loan and all outstanding interest charges when you meet one of the following conditions:

• When you move out
• When you sell
• When the last borrower dies
• If you default on the loan

The definition of defaulting on your reverse mortgage loan requires some extra attention as it can refer to multiple scenarios, including:

• Lying on your reverse mortgage application
• Using the funds from your reverse mortgage for illegal activity
• Letting your home fall into disrepair
• Not following the conditions outlined in your contract

Like any contract, you need to review the terms and conditions before you sign. If you were to pass away, your estate has a legal obligation to repay the amount owing within a set period.

» FIND OUT: What happens if you break your mortgage contract?

Pros and cons of a reverse mortgage

Reverse mortgages are not the most popular product, but that doesn’t mean they don’t have their benefits. Ultimately, homeowners need to consider the advantages and disadvantages to decide if a reverse mortgage is right for them.

Pros of a reverse mortgage

• Additional income. The monthly income will help you increase your cash flow.
• No regular repayments. Although you are charged interest on the loan, there’s no need to make monthly payments.
• No need to move. You get to unlock the equity in your home without having to move.
• You still own the home. Your name remains on the title of the home.
• No negative equity guarantee. You can never owe more than what the property is worth.
• It does not affect your other income. Money generated by a reverse mortgage does not affect your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.

Cons of a reverse mortgage

• Higher interest rates. The rate you’ll pay is typically higher than a HELOC or traditional mortgage.
• Reduced equity. As you borrow more and interest charges accumulate, you’ll lose more of your home’s equity.
• You need to pay back the loan. If you pass away, your estate will need to repay the loan and all accumulated interest charges.
• Initial costs required. You may need to pay administration, appraisal and legal fees.
• Prepayment penalty. If you choose to sell your home or pay off the loan before the last borrower dies, you will be charged prepayment fees.

A reverse mortgage can be good in certain situations, but it might be cheaper to get a HELOC, personal loan or line of credit if you need help managing your monthly expenses. Other considerations include downsizing or renting your home to access extra funds. Be sure to seek professional advice before you make your decision.

How does a reverse mortgage work?

A reverse mortgage is a loan that doesn’t have mandatory principal and interest payments. The loan’s funds come from your home equity and can be delivered as a lump sum or in instalments.

The money can be used for anything you like, such as home renovations, debt repayment, or even vacations. You still retain the title to your home, but a lien will be registered on your home. You’re also still responsible for the maintenance of your home and you must continue paying property taxes.

» MORE: You can tap into 80% of your home’s equity with a second mortgage